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1Citigroup Global Markets Asia
Citigroup Global Markets
Ticker Company Rating Target Price Current Year
Earnings Estimates
Next Year
Earnings Estimates
0493.HK GOME 1H HK$2.30 Rmb0.176 Rmb0.188
0980.HK Lianhua Supermarket 1M HK$10.40 Rmb0.562 Rmb0.648
previously 3M HK$8.60 Rmb0.433 Rmb0.488
1833.HK Intime Department Store 3H HK$2.25 Rmb0.189 Rmb0.161
previously 1H HK$10.40 Rmb0.255 Rmb0.345
3308.HK Golden Eagle Retail Group 2H HK$4.50 Rmb0.251 Rmb0.273
previously 1M HK$10.00 Rmb0.235 Rmb0.320
3368.HK Parkson Retail Group 3H HK$6.00 Rmb0.313 Rmb0.331
previously 2L HK$16.40 Rmb0.347 Rmb0.436
8277.HK Wumart 1M HK$7.60 Rmb0.290 Rmb0.360
previously 3H HK$6.70 Rmb0.277 Rmb0.341
Asia Pacific | China
Retailing - Broadlines (Citi)
Multi-Company
18 November 2008 49 pages
China Retail
Downgrading Department Stores, Upgrading Supermarkets
Department stores to continue to underperform — We are slashing estimates and
target prices for China department stores as we lower our same-store sales (SSS)
and margin assumptions. The consensus is still too optimistic, in our view.
Supermarket operators are enjoying better earnings visibility into 09E and hence
we upgrade the segment. We downgrade Parkson and Intime to Sell, and Golden
Eagle to Hold; we retain Buy on Gome and upgrade Lianhua Supermarket and
Wumart to Buy. We also revise the risk codes for some stocks to reflect either
company-specific issues or our quant rating system.
Retail sales slower in Oct — Retail sales of major consumer goods sold at
department stores slowed sharply in Oct. Lower SSS growth was also heard from
listed department stores. Although on an adjusted basis the slowdown is not that
alarming, the overall downtrend could be just the beginning of more
disappointments from department stores.
Lower traffic, more promotions at department stores — Channel checks in
Shanghai suggest lighter traffic at department stores. According to local media, a
number of department stores in the prime retail area of Xujiahui reported a 10-
15% decline in sales in the weeks after the Golden Week holiday. The drop is
prompting aggressive promotional activities at many stores.
Tightening the purse strings — Amid the economic slowdown and job insecurity,
we expect urban income growth to fall and see urban consumers becoming more
cautious on spending. No doubt the government has announced a fiscal stimulus
package, but the results are unlikely to be immediate.
Sandy Chen1
+86-21-2896-3878
sandy.w.chen@citi.com
Ross Wei1
ross.wei@citi.com
See Appendix A-1 for Analyst Certification and important disclosures.
China Retail
18 November 2008
Citigroup Global Markets 2
October Retail Sales Data Point to Slowdown 3
Lighter traffic prompting more promotions 3
Tightening the purse strings 4
Downgrading department stores and upgrading supermarkets 5
Companies 8
Golden Eagle Retail Group (3308.HK) 9
Intime Department Store (Group) (1833.HK) 13
Lianhua Supermarket (0980.HK) 19
Parkson Retail Group (3368.HK) 24
Wumart (8277.HK) 30
GOME (0493.HK) 36
Appendix A-1 45
Analyst Certification 45
Contents
China Retail
18 November 2008
Citigroup Global Markets 3
October 08 retail sales data show a slowdown in the major consumer goods
categories sold at department stores. Cosmetics, garments, footwear and
jewellery account for 70%-plus of department stores’ merchandise sales.
Figure 1. October 08 Retail Sales of Key Department Store Products (Percent)
1H08 Jul 08 Aug 08 Sep 08 1Q-3Q08 Oct 08 Oct vs 1Q-
3Q08
Cosmetics 21.2 31.8 26.6 28.5 23.6 14.5% -9.1
Garments, footwear etc. 25.1 27.5 27.6 28.0 25.9% 18.7 -7.2
Jewellery 43.9 43.6 44.3 35.3 42.9% 30.6 -12.3
Source: National Statistics Bureau, CEIC Data and Citi Investment Research
Figure 2. Adjusting for Golden Week Timing Effect
Jan-Aug 08 Sep & Oct 08 Sep & Oct vs Jan-
Aug 08
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s.
Cosmetics 23.0% 21.0% -2.0
Garments, footwear etc. 25.6% 22.8% -2.8
Jewellery 44.0% 32.9% -11.1
Source: National Statistics Bureau, CEIC Data and Citi Investment Research
Lighter traffic prompting more promotions
Channel checks at department stores in Xujiahui, Shanghai, suggest that traffic
is lighter. The Shanghai Evening Post has also reported that since 6 October
(after the Golden Week), four department stores — Shanghai No.6 Department
Store, Huijin Department Store, Pacific Department Store and Oriental
Shopping Center — in Xujiahui have seen their sales declining by 10-15% yoy.
Consumers are visiting stores less frequently or are delaying purchases.
The downtrend is prompting stores to launch aggressive promotional activities.
Since 14 November, Pacific Department Store at Xujiahui has been offering a
reduction of Rmb150 on every Rmb300 purchase and, for the first time ever, is
offering an Rmb200 gift coupon on every Rmb2,000 purchase. It will start
offering similar promotions at its two other stores in Shanghai.
The stores at Nanjing Road East, which target mass-market consumers, are
also making similar promotions. The Economic Commission of Huangpu
District is calling on department stores along the Nanjing Road East
Pedestrians Street and in Yuyuan Garden (both of which are under its
jurisdiction) to start a ‘100-day Store Promotion’ in an attempt to stimulate a
rebound in sales momentum.
Since 14 November, Intime’s Wulin flagship store has been having promotional
events in celebration of its 10th anniversary. Its best offer is a reduction of
Rmb250 for every Rmb400 purchase. Hangzhou Mansions, a high-end
department store in the neighborhood, is offering a reduction of up to Rmb280
for every Rmb400 purchase.
Parkson’s management made some cautious remarks on the near-term outlook
in its 3Q08 results announcement. Management sees the need to slow brand
mix upgrades and to resort to aggressive promotions in stores along the coastal
regions.
October Retail Sales Data Point to Slowdown
10-15% yoy fall in sales at major
department stores after Golden Week
Promotions getting aggressive
Not just in Shanghai
China Retail
18 November 2008
Citigroup Global Markets 4
Tightening the purse strings
In 1998 China’s GDP growth fell below 8% and nominal urban per-capita
income growth declined to a low of 5.1% amid the Asian financial crisis. Retail
sales of cosmetics, garments, footwear and jewellery (through retail enterprises
above Rmb5m) fell 3.5% yoy, but subsequently picked up along with the
recovery in urban income growth.
Figure 3. Per-Capita Urban Income Growth vs. Retail Sales of Garments, Footwear, Cosmetics, Jewellery
-3.5%
3.9%
10.0% 9.9%
8.8%
13.9%
21.0%
26.0%
21.3%
27.4% 27.5%
23.8%
13.0%
6.6%
12.3%
10.0%
11.2% 11.4%
12.1%
17.2%
14.7%
5.1%
7.9%
7.3%
9.2%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Jan-
Aug
2008
Sep-
Oct
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Nominal urban per capita income growth (RHS)
Nominal retail sales growth of garment, footwear, cosmetics
and jewellery (LHS)
Source: CEIC Data and Citi Investment Research
Amid the economic slowdown and job insecurity, we expect urban income
growth to fall and see urban consumers becoming more cautious on spending.
No doubt the government has announced a fiscal stimulus package, but the
results are unlikely to be immediate.
The latest private-car licence plate auction for November held in Shanghai
recorded a 27% mom (55% yoy) decline in the average successful bidding
price — the largest decline since the government revised bidding rules at the
start of the year. This is yet another piece of anecdotal evidence of a more
cautious consumer sentiment.
1998: Cosmetic, garment, footwear and
jewellery sales declined by 3.5% yoy as
income growth fell to a low
Price of Shanghai private-car licence
plate down 27% mom and 55% yoy
China Retail
18 November 2008
Citigroup Global Markets 5
Figure 4. Average Successful Bidding Prices: Shanghai Private Car Licence Plate Auction
0
10,000
20,000
30,000
40,000
50,000
60,000
Ja
n-
05
Ap
r-
05
Ju
l-0
5
Oc
t-
05
Ja
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06
Ap
r-
06
Ju
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6
Oc
t-
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Ja
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7
Oc
t-
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Ja
n-
08
Ap
r-
08
Ju
l-0
8
Oc
t-
08
Rmb
Change in bidding rule implemented
Source: Shanghai International Merchandise Auction Co. and Citi Investment Research
Downgrading department stores and upgrading supermarkets
We are slashing our estimates for China department stores as we lower same-store
sales (SSS) and margin assumptions. The consensus is still too optimistic, in our
view. We downgrade Parkson and Intime to Sell, and Golden Eagle to Hold.
Figure 5. CIR vs. Consensus Net Profit for Department Stores
Consensus Net Profit
(Rmb m)
CIR Reported Net Profit
(Rmb m)
Difference from
Consensus
Price
(HK$)
CIR
Rating
08E 09E 08E 09E 08E 09E
Parkson 3368.HK 6.30 3H 924 1,179 875 927 -5% -21%
Golden Eagle 3308.HK 3.90 2H 563 633 584 496 4% -22%
Intime 1833.HK 2.18 3H 498 545 433 290 -13% -47%
Source: Bloomberg and Citi Investment Research estimates
Despite supermarket operators’ outperformance year to date, we upgrade Lianhua
Supermarket and Wumart to Buy on reasonably good earnings visibility going into
09E and their defensive nature.
China Retail
18 November 2008
Citigroup Global Markets 6
Figure 6. Snapshot of Target Price and Valuation Method Changes
RIC Target Price
(HK$)
Earnings Revisions
(%)
Valuation Methods
New Old 08E 09E New Old
Parkson 3368.HK 6.00 16.40 -10 -24 Trough PER (12.6x) and DCF (Cost of Equity
at 15%, terminal growth at 2%)
PEG of 1x and DCF (Cost of Equity at
11.3%, terminal growth at 5%)
Golden Eagle 3308.HK 4.50 10.00 -2 -22 Trough PER (13.3x) and DCF (Cost of Equity
at 15%, terminal growth at 2%)
DCF (Cost of Equity at 11.9%, terminal
growth at 5%)
Intime 1833.HK 2.25 10.40 -26 -53 Trough PER (8.8x) and SOTP (Cost of Equity
at 17.1%, terminal growth at 2%)
SOTP (Cost of Equity at 12.9%, terminal
growth of 5%)
Lianhua Supermarket 980.HK 10.40 8.60 30 33 Trough PER (12x), EV/EBITDA (4.4x),
Carrefour JV (PER of 14x)
EV/EBITDA (7x), PER (18x)
Wumart 8277.HK 7.60 6.70 5 6 PER (19x, mean-1SD) and EV/EBITDA (9x,
mean-1SD)
SOTP and PEG (0.9x)
Source: Citi Investment Research estimates
Given the slowing economy into 09E, we are revising our valuation
methodologies to incorporate trough valuations.
C
hina R
etail
18 N
ovem
ber 2008
C
itigroup G
lobal M
arkets
7
Figure 7. China Retail — Valuation Comparison
Company Reuters Rating Price TP Price Mkt Cap P/E (x) P/B (x) EV/EBITDA (x) EPS Growth (%) Yield (%)
17-Nov-08 Code Cur Local Local US$mn CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E
China Retail
Anta 2020.HK 1M HKD 3.80 3.10 996 12.8 8.2 7.5 1.6 1.5 1.3 8.4 4.1 3.5 161 56 10 1.9 4.9 5.4
Belle 1880.HK 3L HKD 5.70 3.16 3,439 11.1 10.3 8.1 2.0 1.7 1.5 9.7 6.9 5.5 70 8 27 2.3 2.9 3.7
China Dongxiang 3818.HK 2H HKD 2.25 2.30 1,681 15.7 12.0 11.0 2.0 1.7 1.6 10.0 4.8 4.1 139 31 9 0.5 3.3 3.7
China Hongxing CHXS.SI 3H SGD 0.17 0.21 351 6.3 5.4 6.0 0.7 0.6 0.6 -0.2 1.7 1.8 66 18 -10 4.3 5.1 4.2
China Sports CSIL.SI 3H SGD 0.14 0.15 67 2.9 2.3 3.5 0.7 0.6 0.5 0.4 1.0 1.7 48 26 -33 6.9 8.6 5.7
Golden Eagle 3308.HK 2H HKD 4.50 3.90 915 21.4 13.7 12.6 5.0 3.6 2.9 10.8 7.5 4.9 18 57 9 1.3 1.9 2.4
GOME Electrical 0493.HK 1H HKD 2.30 1.40 2,305 10.0 7.0 6.6 1.6 1.7 1.5 6.2 5.4 4.3 57 43 7 3.6 4.3 4.6
Intime Department Store 1833.HK 3H HKD 2.25 2.18 506 12.3 10.2 11.9 0.9 0.9 0.8 6.1 4.7 3.0 12 21 -15 3.3 3.8 2.5
Li Ning 2331.HK 3M HKD 9.50 10.28 1,380 20.1 13.3 11.5 6.0 4.9 4.0 14.3 8.2 6.9 61 51 15 2.5 3.8 4.5
Lianhua Supermarket 0980.HK 1M HKD 10.40 8.65 694 17.7 13.5 11.8 2.2 2.0 1.8 3.1 2.9 2.7 11 30 15 2.4 2.6 2.6
Parkson 3368.HK 3H HKD 6.00 6.30 2,266 22.9 17.7 16.7 6.3 5.1 4.4 13.9 8.9 6.6 45 29 6 2.2 2.8 2.9
Prime Success 0210.HK 1L HKD 6.30 1.78 376 7.6 5.8 4.4 2.1 1.6 1.3 4.7 3.5 2.5 32 31 31 2.8 3.5 4.5
Wumart Stores Inc. 8277.HK 1M HKD 7.60 5.76 907 23.7 17.5 14.1 2.9 2.5 2.3 11.0 7.9 6.4 30 36 24 2.6 2.3 2.8
Mkt Cap Wght Avg. Aggregate 15,884 15.4 11.7 10.4 3.0 2.6 2.2 9.5 6.3 5.0 66 32 13 2.3 3.3 3.7
Simple Avg. 14.2 10.5 9.7 2.6 2.2 1.9 7.6 5.2 4.2 58 34 7 2.8 3.8 3.8
Source: Company and Citi Investment Research estimates
Figure 8. China Retail — Profitability Comparisons
Company Reuters Rating Price TP Price Mkt Cap EBITDA Margin (%) EBIT Margin (%) Net Margin (%) ROE (%)
17-Nov-08 Code Cur Local Local US$mn CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E CY07 CY08E CY09E
China Retail
Anta 2020.HK 1M HKD 3.80 3.10 996 15.8 19.1 18.9 14.9 18.1 17.6 16.9 18.1 17.1 24.2 18.9 18.5
Belle 1880.HK 3L HKD 5.70 3.16 3,439 18.4 17.3 16.1 15.0 14.0 13.7 17.0 12.2 12.0 27.1 17.8 19.5
China Dongxiang 3818.HK 2H HKD 2.25 2.30 1,681 42.2 38.7 36.2 41.2 36.4 33.7 42.9 36.2 29.5 23.6 15.3 15.1
China Hongxing CHXS.SI 3H SGD 0.17 0.21 351 24.7 21.4 19.7 23.0 19.5 17.2 20.4 16.9 15.3 19.3 13.1 10.4
China Sports CSIL.SI 3H SGD 0.14 0.15 67 17.8 14.2 12.0 17.5 13.8 10.8 12.8 11.1 9.7 46.6 28.5 16.0
Golden Eagle 3308.HK 2H HKD 4.50 3.90 915 52.6 53.5 52.0 47.6 48.8 46.8 34.8 42.0 33.2 32.4 39.4 43.5
GOME Electrical 0493.HK 1H HKD 2.30 1.40 2,305 5.5 6.1 6.1 4.9 5.4 5.3 2.7 4.5 4.5 21.7 23.6 24.3
Intime Department Store 1833.HK 3H HKD 2.25 2.18 506 44.6 44.0 39.8 40.0 34.3 29.0 42.8 36.3 20.0 14.7 11.5 14.2
Li Ning 2331.HK 3M HKD 9.50 10.28 1,380 15.6 15.5 15.2 13.9 14.2 14.0 10.9 10.4 10.2 32.8 40.9 38.7
Lianhua Supermarket 0980.HK 1M HKD 10.40 8.65 694 2.6 4.2 4.2 (0.1) 1.9 2.0 1.5 1.6 1.7 13.5 11.8 12.3
Parkson 3368.HK 3H HKD 6.00 6.30 2,266 36.9 36.9 34.9 33.2 33.4 31.4 22.1 23.9 22.4 30.1 37.2 38.7
Prime Success 0210.HK 1L HKD 6.30 1.78 376 16.4 16.3 17.1 13.9 13.8 14.5 10.0 10.0 10.6 32.7 32.0 32.4
Wumart Stores Inc. 8277.HK 1M HKD 7.60 5.76 907 6.9 7.5 7.6 5.2 5.7 6.0 4.2 5.8 4.2 14.4 15.3 16.9
Mkt Cap Wght Avg. Aggregate 15,884 22.8 22.6 21.5 20.4 19.9 18.9 18.2 17.2 15.0 25.3 24.1 24.9
Simple Avg. 23.1 22.7 21.5 20.8 19.9 18.6 18.4 17.6 14.6 25.6 23.5 23.1
Source: Company and Citi Investment Research estimates
China Retail
18 November 2008
Citigroup Global Markets 8
Companies
China Retail
18 November 2008
Citigroup Global Markets 9
Golden Eagle Retail Group (3308.HK)
Downgrade to Hold: Slower Momentum and Risky Acquisition
Lowering target price to HK$4.50 — We are cutting core net profit forecasts
by 2% for 08E and 22% for 09E as we lower same-store sales growth for the
two years. Our new target price is the average of our DCF valuation and the
trough P/E of 13x on 09E. Upside potential is 17%, but with our risk rating
now High, we downgrade the stock to Hold. However, the company’s
controlled pace of expansion, strong balance sheet and high property
ownership should make it less sensitive to revenue declines.
SSS growth slower in October — Overall SSS growth stood at 15% in
October, a slowdown from 28% in 1H08. The Nanjing flagship store saw SSS
growth declining to high single digit rates, while stores in Yangzhou, Suzhou
and Xuzhou saw SSS growth slowing to 15-20%. The company is making
adjustments to brand mix at each store depending on market conditions.
CB holders’ put option likely to be exercised in Oct 09 — Its CB holders
have an option to redeem the HK$1bn CB (convertible at HK$6.42, maturing
Oct 2011) in October 09 at a 15.8% premium. We now assume that the put
option will be exercised in 09. Even with the early redemption, we expect the
company to remain in a net cash position.
Proposal to acquire parent’s Shanghai store is a risk — The Shanghai store
has been loss-making and will be closed until April for remodeling. The
proposed sum is around Rmb1bn, with an upfront cash outlay of Rmb360m
and assumption of an Rmb638m loan. The timing of the acquisition is not
good, in our view. We therefore rate the stock High Risk.
Company Focus
Hold/High Risk 2H
from Buy/Medium Risk
Price (17 Nov 08) HK$3.90
Target price HK$4.50
from HK$10.00
Expected share price return 15.4%
Expected dividend yield 1.9%
Expected total return 17.3%
Market Cap HK$7,090M
US$915M
Price Performance (RIC: 3308.HK, BB: 3308 HK)
Statistical Abstract
Year to Net Profit Diluted EPS EPS growth P/E P/B ROE Yield
31 Dec (RmbM) (Rmb) (%) (x) (x) (%) (%)
2006A 247 0.136 1.4 25.3 6.9 38.7 1.8
2007A 292 0.160 18.2 21.4 5.0 27.0 1.3
2008E 457 0.251 56.5 13.7 3.6 30.6 1.9
2009E 496 0.273 8.6 12.6 2.9 25.6 2.4
2010E 601 0.331 21.3 10.4 2.4 25.5 2.9
Source: Powered by dataCentral
Change in opinion
Rating change
Target price change
Estimate change
China Retail
18 November 2008
Citigroup Global Markets 10
Lowering core earnings forecasts
We are cutting our core net profit and basic core EPS forecasts by 2% and 22%
for 08E and 09E as we lower same-store sales growth for the two years. We are
now modeling 3% growth for 09E (down from 19%). Factoring in non-core
items, including gains on investment, forex gains on CB and fair value gain on
derivative components of CB, we expect reported net profit to go up by 26% for
08E. Based on our revised forecasts, we expect core earnings growth to fall to
9% in 09E before recovering to 21% in 10E.
Figure 9. Earnings Revisions for 08E and 09E
08E 09E 10E
Same-store sales growth
New 19% 3% 8%
Old 20% 19% -
Reported Net Profit
New 584 496 601
Old 464 632 -
Change 25.7% -21.6% -
Core Net Profit
New 457 496 601
Old 464 632 -
Change -1.7% -21.6% -
Basic Core EPS
New 0.25 0.27 0.33
Old 0.26 0.35 -
Change -1.7% -21.6% -
FD Core EPS (adjusted for CB dilution on assumption that CB will be redeemed in 09)
New 0.25 0.27 0.33
Old 0.24 0.32 -
Change 6.7% -14.9% -
Source: Citi Investment Research estimates
SSS growth slower in October
Overall SSS growth stood at 15% in October, a slowdown from 28% in 1H08.
The Nanjing flagship store saw SSS growth down to a high single digit, while
stores in Yangzhou, Suzhou and Xuzhou reported a SSS growth decline to 15-
20%. Golden Eagle is making adjustments to its brand mix at each store
depending on market conditions. Given the macro headwinds, we are cutting
our SSS growth assumption more aggressively for 09E to 8% from 19%.
CB holders’ put option likely to be exercised in Oct 09
Golden Eagle has HK$1bn CB outstanding, convertible at HK$6.42, maturing in
Oct 2011 and redeemable at a 27.7% premium. The CB holders have an option
to redeem the CB in October 09 at a 15.8% premium. We now assume that t